The Fed is conducting it’s QE to lower the risk free term structure of rates for the further purpose of supporting lending in the economy in general.

The ECB is buying member nation debt in the marketplace specifically to help member nations fund the deficits and avoid default.

What the ECB is doing for Greece, Portugal, and Ireland is more analogous to what the Fed did a couple of years ago when it bought corporate debt (commercial paper) from the likes of GE and GM to keep them afloat.

In fact, the ECB can’t ‘expand into US Federal Reserve-style“quantitative easing” ‘ even if it wanted to, because there are no euro equivalents of US Treasury securities. (Not that the Fed’s QE does anything of substance for the US economy, inflation, or the dollar.) About the closest the ECB could come to a ‘Fed style QE’ would be to receive fixed in euribor swap market, which is not even a consideration, as their issue is the solvency of their member nations and not the risk free term structure of rates in general.

Meanwhile, as previously discussed, as long as the ECB keeps buying, it all muddles through.

ECB Increases Intervention in Bond Markets

The European Central Bank increased its intervention in government bond markets last week, indicating that the euro’s monetary guardian remained wary of an escalation of the eurozone debt crisis.

Purchases under the ECB’s securities market programme rose to €1.1 billion ($1.4 billion) from €603 million in the previous week, according to figures released on Monday.

The acceleration highlights how the ECB has been forced into action to prevent governments’ borrowing costs spinning out of control, even though it sees the main responsibility for restoring investor confidence in Europe’s 12-year-old monetary union as lying with political leaders.

The previous week’s figures had pointed to a lull in the ECB’s intervention. The rise came in spite of thin trading before the Christmas and new year holidays.

The ECB argues its action is aimed simply at correcting malfunctioning markets – and will not be allowed to expand into US Federal Reserve-style“quantitative easing” to support the economy.

“Helping governments cannot and should not be a goal of these operations,” Jürgen Stark, an ECB executive and one of its governing council’s more hawkish members, told the German newspaper Stuttgarter Zeitung at the weekend.

The latest increase could add to the discomfort of ECB policymakers, however, if it encourages expectations that the ECB will become more aggressive.

Because of the increased risks it is bearing, the ECB said this month it would double to €10.76 billion its subscribed capital, which would allow it to increase provisions against losses.

The announcement triggered speculation that the ECB was preparing to accelerate its bond purchases. However, Mr Stark said the increase had “nothing to do with the current situation but dates from analysis that we started in 2009”.

The ECB began buying bonds in May, at the height of this year’s eurozone crisis. After weekly purchases of €10 bilion or more, the programme was scaled down, with the weekly figures sometimes falling to zero.

But in early December the programme was reactivated – although still not up to its initial scale.

The ECB does not give precise details but recent purchases are thought to have been concentrated on Portuguese and Irish bonds, where financial market tensions have been focused.

Total purchases since the programme started in May have reached €73.5 billion – an amount the ECB will on Tuesday seek to reabsorb from the eurozone financial system to offset the inflationary impact of its action.

9 Responses

  1. “The Fed is conducting it’s QE to lower the risk free term structure of rates for the further purpose of supporting lending in the economy in general.”

    Warren – The Fed’s objective to use QE-2 to lower long term interest rates doesn’t seem to be working very effectively. Problem is as you have pointed out is that they should be targeting rate/(price) not supply.

  2. According to Chris Whalen of IRA Analyst, the Fed intended QE1 and 2 chiefly as a subsidy for the banks.


    1. Yes. Whalen’s interpretation seems entirely consistent with earlier TARP bailout of Wall Street plus a host of other non-conventional funding programs. All QE1&2 did and continues to do is to provide dealers a pump & dump opportunity to front run the POMO buy-backs only to offload them to the Fed. QE-2 sure didn’t do much to lower the term structure of 5yr rates if today’s 5yr auction is any indication.

    2. Tom,
      What about if the Fed is the largest buyer (and at 110B/mo. they are practically buying ALL of any new net issuance of USTs) and they keep lowering their bid day after day after day? (What Mike pointed out is termed ‘scale down buying’) while a large amount of speculators short the bonds due to “money printing” and “debasing”….

      This combo looks like at least on the surface it may have the effect of putting downward pressure on the bond prices at least short term. ie they should be buying “worst price” if they wanted to support bond prices and/or lower interest rates and they may not be doing that…. as Warren points out focusing on quantity alone, thinking that should do the trick.

      If they keep doing this they (FED) will perhaps make a fortune as after the QE2 stops, a big rally in bonds could ensue just like after QE1 stopped earlier this year…. FED having bought on a scale down will lower its average price for the bonds, etc…

      1. Matt,
        I thought the details of QE were to buy back T-bonds from primary dealers, a process semantically if not formally separate from buying new T-bonds. Together, they allow the FED to give PDs a bit of extra cash now for any old bonds held, plus drive down the cost of getting back into such bonds after the FED bids them down directly? The 1,2 combo allows the FED extra leeway in keeping some big banks solvent?

        Which is entirely different from whether the same bankers should be in jail. That’s not the FED’s primary jurisdiction. Plus, some current officials would have to recuse themselves from the process, having served in all parts of all sides of the entire process.

      2. Roger,
        Yes I also believe Fed is not buying at new UST auctions, I was just trying to indicate scale of Fed buying. They are buying near the equivalent of all of the NFAs currently being created by the Treasury (110B/mo). Based on this I would have to think they are the largest buyer in the Treasury market universe and of course have very deep pockets, similar to a “Commercial” participant in a commodity market. Very influential. They have the ability to keep buying even though the price is moving against them. (Not subject to a margin call)


      1. That’s what I assume also, and if equities get “priced higher than they would be otherwise,” so much the better.

        Whalen just threw this out and I can’t figure out his thinking on it. Based on other things he has said, I doubt he gets monetary ops.

  3. “€73.5 billion …. an amount the ECB will on Tuesday seek to reabsorb from the eurozone financial system to offset the inflationary impact of its action”

    And how did that go overall? 🙂 More importantly, what was the distribution pattern of the currency “reabsorbed”?

    It really is hard to imagine that participants in a shell game aren’t aware of their context.
    Is it only the ECB delegates that are clueless?
    Rule #1: Don’t send an economist to a reality fight. 🙁

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